ECON 205 2nd Edition Lecture 13 Outline of Last Lecture Income Convergence of India and the United States Outline of Current Lecture I Writing Papers instructions and how to II A Central Bank s Role III The Federal Reserve Continued a How the Federal Reserve Manipulates the Markets b Interest Rates and Federal Reserve Control c In depth treatment of Fed s Goals IV Income Convergence of Malaysia and the United States Current Lecture I Writing Papers instructions and how to For those writing papers on convergence or any other topic papers should be around seven pages or a few pages within that margin First have an introduction introducing the problem discussed i e China or India s income convergence social issues etc Second make graphs to chart the per capita income of your country of choice versus the per capita income of the United States One graph should represent the per capita income PCI of your country over time versus the PCI of the United States the second should represent the level the ratio slope of the growth of the PCI of both countries over time II A Central Bank s Role Every country in the world has a central bank The central bank plays a huge role in the monetary aspect of the country s economy in terms of economic development and growth the monetary aspect is probably the most important III The Federal Reserve Continued The Federal Reserve system is the central bank of the United States there are twelve regional federal reserve banks and the federal reserve board in Washington D C The goals of the Fed are economic stability low and stable inflation low unemployment and rapid economic growth a stable exchange rate for currency coordination with fiscal policy central bank independence and determining short term investments IIIa How the Federal Reserve Manipulates the Markets Open market operations practiced by the Fed like the buying and selling of government bonds alter the economy selling bonds helps stimulate a low economy while overheating makes them buy government bonds Another way they change the economy is by changing the fractional reserve requirements which means banks are supposed to keep a fraction of their deposits IIIb Interest Rates and Federal Reserve Control The Federal Fund Rate is the lowest interest rate in the United States The second interest rate that the Fed establishes is the discount rate it is the rate the Fed Reserve bank charges whenever a commercial bank borrows money from the Fed Whenever a commercial bank s fractional reserves falls below the necessary margin they have to borrow money from other banks or the Fed The Fed controls the short term rates of interest however the long term rate is determined by the supply and demand in the market Certain big items are sponsored by selective controls like the rate needed to be put down for items like cars and homes IIIc In depth treatment of Fed s goals In terms of economic growth anything over 2 is very good because our long term average is 1 9 If we have for instance 4 growth we would have lower unemployment overall Secondly coordination with fiscal policy means the Federal Reserve needs to work with the government fiscal policy in order to stabilize the economy By influencing fiscal policy we can either have a surplus or a deficit usually a deficit and monetary policy can help assuage some debt concerns The third goal central bank independence is that all central banks try to maintain independent connections to the government while in other nations the Central Bank is part of the government the Fed in the United States is completely autonomous of the administration IV Guest Presentation Income Convergence of Malaysia and the United States Malaysia is the 67th ranked country by area with a population of 28 million It s capital and largest city is Kuala Lumpur and is a majority Muslim parliamentary democracy It is multiethnic and multilingual having gained independence from Britain in 1957 and settled into current borders by 1965 It is the third richest and largest economy in Southeast Asia and is a newly industrialized nation Currently Malaysia is 30 as rich as the United States in per capita GDP To find the exact catch up time pick a time period say 1980 2010 Calculate the growth rate of Malaysia and the growth rate of the United States G US US GDP of 2010 GDP in 1980 1 30 1 1 7 Suppose at year T Malaysia will catch up with the US Then the GDP per capita of the US at T will equal the GDP per capita of Malaysia at T US GDP in 2010 x 1 growth rate of the United State T 2010 Malaysia GDP in 2010 1 growth rate of Malaysia T 2010 Taking the natural log of both sides gives a T of 2080 To graphically figure out the data extrapolate the slope of each function per year Issues that Malaysia faces are not severe and basic socioeconomic measures are rather good It s GINI coefficient is comparable to the United States its Human Development Index is considered rather high at 0 76 it has a high literacy rate and universal public healthcare Issues however it faces are corruption 60th in the world an increasingly outspoken demand for civil liberties political freedom press freedom and the rule of the law a competitiveness with other countries coupled with brain drain and an overreliance on petroleum in federal budget